Important Terms To Remember In A Life Insurance Policy

A life insurance policy is a policy that covers the life of insured. Depending on the type of insurance policy, it provides a return to the policyholder and can effectively be used as a tool to financially secure the family of the policyholder. Life insurance is extremely crucial to have and it can be used in different ways to finally secure the family.

You can invest in a Unit Linked Insurance Plan (ULIP) to save for your child’s education or buy a term life insurance policy to save your investments or provide a backup for a secured loan like a home loan. A life insurance policy is an excellent investment.

However, if you’re looking for a life insurance policy, you must understand a few terms. Knowing these terms will help you read the insurance policy better and buy the right policy:

Policy:

A policy is a contract between the insurance company and you to cover your life. The contract contains details about the sum that will be paid out in different conditions. It also has the exclusions in which case the sum assured won’t be paid out. It is important to read the complete policy document before buying.

Sum assured:

Sum assured is the amount that will be paid to the nominee in case of death of the policyholder. This amount is decided while the policy is bought. One of the factors influencing the premium amount is the sum assured chosen.

Endowment plan:

An endowment plan is a type of life insurance which has a maturity benefit as well. This means if the policyholder survives the policy term, a certain sum will be returned. This includes any bonus or additions.

Unit Linked Insurance Plan (ULIP):

A ULIP invests some portion of the premium into market linked instruments. It pays the higher of the sum assured, 105% of the premiums paid or the fund value on maturity i.e on survival.

Term Insurance:

This is a life insurance policy that pays out the sum assured on the death of the policyholder. If you survive the policy term then nothing will be paid out under this policy. This is also called pure insurance.

Policy tenure:

The policy tenure is the number of years for which the policy is active. If the policyholder survives the policy tenure then the maturity value will be paid out except in case of a term insurance. Generally, the policy tenure is between 15 to 25 years. However, the tenure for a term insurance is higher.

Premium paying term:

This means the number of years for which the premium needs to be paid on a life insurance policy. It is equal to or lesser than the policy tenure.

Nominee:

The nominee is the person who is nominated to receive the proceeds under the life insurance policy in case of the death of the policyholder.

Riders:

Riders are add ons or additional coverage that is provided under a life insurance policy. They provide additional compensation over and above that specified in the insurance policy. For example, a critical illness rider will pay the rider sum assured in case of diagnosis of the rider.

Claim:

A claim is the process of informing the insurer about the death of the policyholder or maturity of the policy to collect the proceeds under life insurance. Each insurer has his own claim settlement procedure.

Arjit Chalmela is a finance student who loves to write in his free time. He has spent considerable time researching the foreign exchange rate.